Wednesday, October 29, 2014

Market Commentary (audio)

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Hey!! I thought raising the minimum wage was supposed to be a good thing!

From the New York Post's "Buffalo Wild Wings Hiking Menu Prices":
“Current costs for traditional chicken wings of $1.98 per pound are 30 percent higher than our third-quarter average cost,” Chief Executive Sally Smith said.

“Given this trend and known raises in certain minimum wage rates, we are increasing menu prices an average of 3 percent at the end of November,” she said.

From Washington Policy Center's "Will Seattle Be Ground Zero of an Automation Nation":
Just look at how McDonald’s has responded to France’s $12 an hour minimum wage.  In 2011, McDonald’s invested in 7,000 touch screen computers in France to reduce the number of workers needed.  Restaurants around the country are already exploring automation as a means to cut costs; Applebee’s is installing 100,000 tabletop tablets for ordering and payments.

Many food businesses are considering a machine that can freshly grind, shape and custom grill 360 gourmet burgers per hour, no human labor needed.   Alpha, the burger-making robot, can even slice and dice the pickles and tomatoes, put them on the burger, add condiments and wrap it up.  The manufacturer makes the point that cashiers or servers aren't even needed: "Customers could just punch in their order, pay, and wait at a dispensing window."  The maker says Alpha will pay for itself in a year.

But it isn’t just fast food workers and waiters who will lose their jobs to automation as the result of an artificially high mandated wage.  In response to the threat of a higher minimum wage, a manufacturing company in Seattle has decided to begin replacing most of its 100 employees with automation in coming years.

The company initially planned to simply leave Seattle and relocate in a neighboring city to escape the impending $15 wage mandate.  But once the Governor and some lawmakers began pushing for a higher state minimum wage earlier this year, which is already the highest of any state in the nation, the company made the hard decision to stay in Seattle and begin moving towards automation.  The company shared their story but requested anonymity because its employees do not yet know they will be unemployed in the near future, thanks to the city’s new minimum wage.

Now hey! We've been promised by certain politicians (the featured politician may come as a surprise) and economists that raising the minimum wage wouldn't hurt the consumer---that it wouldn't result in higher prices or lose anybody his/her job. Actually---despite all the supposed "empirical evidence"---I thought it would...

Sunday, October 26, 2014

Market/Economic Update

I started last weekend's letter by defining "volatile" as the previous week's market action and mixed economic signals. The ensuing week told a vastly different story---with the stock market breaking strongly to the upside, and the slew of economic indicators painting a generally positive picture for the U.S. economy.

Could the recent pullback in the major averages be yet another head-fake in a bull market that appears to be sustained by positive earnings, rosy outlooks, low inflation, low interest rates, an accommodative Fed and liquid corporate balance sheets? And could it be that the U.S. economy has finally lifted off the runway?

Yeah, those are legitimate could-bes. But before we throw all caution to the wind and mortgage the almond farm to buy Apple, let's not forget that the stock market, while a great wealth-builder for the patient long-termer, loves to break the hearts of those so naive as to believe that they can consistently interpret, and successfully trade, the economic tea leaves.

That said, as you've seen in the last several updates---the following being no exception---the U.S. employment picture is looking better by the day. Combine that with the recent plunge in energy prices and you have the recipe for an upside surprise come the Christmas retail season. Provided, that is, that the recent sell-off in stocks hasn't done a number on the consumer's psyche---recent sentiment surveys suggest it hasn't.

So then, am I a raging near-term bull? Can I entirely slough off the Euro Zone, Russia, the strong dollar, Ebola, etc.? Actually, I can, but I won't. Anymore than if I were a brooding bear and began this letter by citing the ugly economic signals coming from the Euro Zone, the dangers of a strong dollar, the threat of Ebola, etc. would I entirely slough off the positives I chose instead to reference. And, honestly, whatever the near-term has in store means literally zilch with regard to the long-term success of our clients' portfolios. Why? For the simple reason that the distance between now and year-end 2014 is, to state the obvious, extremely short. Anyone who needs the money they have in stocks between now and year-end has no business being in stocks, regardless of how rosy the picture.

Why, therefore---with such a long-term view---do I bother you with weekly market and economic updates? Well, it's simply because that unless you remain completely out of touch with the mainstream media---in which case you're blessed---you're bombarded with short-term all-over-the-map perspectives on the economy and the financial markets. So I figure you might as well get mine as well. Along with a steady dose of why it's so important to diversify and maintain your long-term perspective/discipline...

Here are the highlights from last week's (U.S.) economic journal, edited for your reading (WOW, MOM, QOQ and YOY mean week-over-week, month-over-month, quarter-over-quarter and year-over-year respectively):

OCTOBER 20, 2014

OCTOBER 21, 2014
ICSC WEEKLY RETAIL SALES came in soft once again last week. Down .3%, and only up 2.1% YoY. This is lower than the typical 4+% rate we tend to see during economic expansions. That said, the report cites strength in electronic and apparel stores. I remain optimistic for the Christmas season based on the improving jobs picture, lower energy prices and a fairly confident consumer.

THE JOHNSON REDBOOK RETAIL SALES showed a healthier retail sector than did the ICSC report. Up .1% MoM (nothing to get too excited about), and up 4.1% YoY---which is within the typical expansion-phase range...

EXISTING HOME SALES improved 2.4% MoM... Yet remain flat YoY: -1.7%...

EXISTING HOME PRICES were down 4% MoM, and up 5.6% YoY... From Econoday's report:

The housing market has been flat but today's report offers a hint of good news, especially given this month's sharp decline in mortgage rates and the steady improvement underway in the labor market. Financial markets are showing little initial reaction to today's report.

API WEEKLY CRUDE STOCK showed a 1.2 million barrel build. Despite higher inventory, oil seems to have found a bottom the past couple of days...

API WEEKLY DITILLATES STOCKS were down .82 million barrels.

API WEEKLY GAS STOCKS were down .532 million barrels...  Oil, etc., inventories are important to track, as they will impact pricing. I.e., higher inventories ultimately translate to lower prices, and vice versa

THE BALTIC DRY INDEX has bounced to 1009... This is a positive read for the global economy, particularly China. In that the index tracks the price of shipping raw materials by sea. The higher the demand for raw industrial materials, the higher the price of shipping and, thus, the higher the index....

OCTOBER 22, 2014
MBA PURCHASE APPLICATIONS continue to show weakness in the housing sector. Econoday's summary:

Mortgage rates are falling fast and are giving a sharp lift to refinancing applications but not applications for home purchases. The refinancing index jumped 23.0 percent in the October 17 week following an 11.0 percent jump in the prior week while the purchase index fell 5.0 percent for a second straight decline. Year-on-year, the purchase index is down 9.0 percent. Mortgage rates have fallen nearly 30 basis points over the past month and were down 10 full basis points in the latest week to an average 4.10 percent for conforming balances ($417,000 or less). The lack of movement for the purchase index underscores the lack of traffic and lack of demand in the housing sector.

THE CPI came in at a very tame .1% increase for September. And 1.7% YOY... The same number with and without food and energy (the .3% increase in food (3.0% YOY) is effectively offset by declines in energy prices)... Clearly, the inflation readings have to be music to the ears of Fed worriers. Here's the BLS summary:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.
Increases in shelter and food indexes outweighed declines in energy indexes to result in the seasonally adjusted all items increase. The food index rose 0.3 percent as five of the six major grocery store food group indexes increased. The energy index declined 0.7 percent as the indexes for gasoline, electricity, and fuel oil all fell.
The index for all items less food and energy increased 0.1 percent in September. Along with the shelter index, the index for medical care increased, and the indexes for alcoholic beverages and for personal care advanced slightly. Several indexes were unchanged, and the indexes for airline fares and for used cars and trucks declined in September.
The all items index increased 1.7 percent over the last 12 months, the same increase as for the 12 months ending August. The 12-month change in the index for all items less food and energy also remained at 1.7 percent. The 12-month change in the shelter index has been gradually increasing, and reached 3.0 percent for the first time since January 2008. The food index has also risen 3.0 percent over the span, while the energy index has declined 0.6 percent.

THE EIA OIL INVENTORIES REPORT showed a continued build of 7.1 million barrels. This was the reported, and logical, excuse for oil prices declining and energy stocks taking a huge hit (xle -1.9%) today. Econoday claims that maintenance at refineries is contributing measurably to the builds:

Maintenance season for refineries is pulling down refinery inputs of oil and contributing to large builds for oil inventories which rose 7.1 million barrels in the October 17 week to 377.7 million. Refineries operated at 86.7 percent of capacity, down from 88.1 percent in the prior week. And wholesale supplies are looking increasingly thin, pointing to the need for greater refinery output. Gasoline wholesales stocks are down 0.2 percent year-on-year while distillate stocks are down 0.6 percent. WTI oil is moving on the large headline build for oil, down more than 50 cents to under $82.

OCTOBER 23, 2014
WEEKLY JOBLESS CLAIMS continue to come in a multi-year lows. The 4-week moving average, at 281,000, is a number lower than we've seen in 14 years. Speaking very favorably about the jobs market and the U.S. economy going forward.

THE CHICAGO FED NATIONAL ACTIVITY INDEX came in strong at .47, from -.25 in August. 

THE FHFA HOUSE PRICE INDEX came back in August by .5%, following a gain of .2% in July. Expectations were for a .3% gain in August.

THE MARKIT FLASH MANUFACTURING PMI showed a slowing for October to 56.2 from September's 57.5. The mid-month flash for September was 57.9. Employment growth, however, held strong at a 2 1/2 year high. September turned out to be a strong month for manufacturing, making MoM comparisons difficult...

THE INDEX OF LEADING ECONOMIC INDICATORS jumped .8% in September. Here's Econoday:

The index of leading economic indicators rose an outsized 0.8 percent in September against an easy August comparison when the index was unchanged. Low interest rates were the major factor contributing to the strength which was very broad based with only one of the 10 components, consumer expectations, in the negative column. The improvement in the labor market was a very strong positive for the month as was the month's strength in manufacturing. Early indications on October's readings are mixed with interest rates moving even lower and the consumer sentiment and consumer comfort indexes both showing strength. On the flat side, however, are unemployment claims and early manufacturing readings.

NAT GAS INVENTORIES rose by 94bcf last week. 3.3 trillion cubic feet currently in storage...

THE KANSAS CITY FED MANUFACTURING INDEX grew modestly in October. Optimism for future activity shows high in the survey. Again, September was a tough act to follow...

OCTOBER 24, 2014
NEW HOME SALES came in at 467k, 1k above August after it was revised down by 38k. September's pace was the best since July 2008.

Wednesday, October 22, 2014

Market Commentary (audio)

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Sunday, October 19, 2014

Market Commentary (audio)

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You may have a problem... And an economic update...

Last week was the definition of volatile, not only for the stock market but---as you'll see below---for economic data as well. Despite relatively weak retail numbers, consumer sentiment readings improved. I'm thinking optimism for the coming retail season is warranted, given the improving jobs picture and dramatically lower energy prices.

As for the stock market, as I reported last week, the recent downward spikes probably had as much to do with technicals (major averages breaking through previously established support levels and, thus, triggering large sell programs) and mandatory selling (margin calls and fund liquidations)---stuff that shouldn't matter to investors (as opposed to traders)---as they did with fears over plunging oil prices, weakness in Europe and Ebola.

Falling energy prices, at this juncture (in my view) are a net positive for the economy and, therefore, for the overall market. The concern with regard to the Euro Zone is whether or not the U.S. economy can continue to improve amid such poor results among major trading partners. Time will tell---but, so far so good.

I'm sticking with my position that the huge gains we realized last year were largely the result of the market accurately discounting this year's pick up in the U.S. economy. And for stocks to move substantially higher from here, that pick up will have to gain momentum and result in earnings catching up to share prices. I.e., today's price of your average share of stock more fully reflects its true value than it did at the start of last year. Should earnings accelerate amid a slower rise in share prices (perhaps global worries will constrain price appreciation), we could find our U.S. equity exposure looking very attractive once again---from a pure valuation standpoint. Of course another path to that place is through a decline in share prices. While I'm not nearly ready to declare U.S. stocks as attractive as I saw them in January '13, they've moved a bit in that direction over the past few weeks.

In full disclosure, while I was reporting that I thought stocks were historically cheap at the beginning of last year, I was not forecasting last year's huge gains.

As for our non-US exposure, there's where---from purely a valuation standpoint---it kinda feels like January '13 did for US equities. However, it's difficult to make much of an economic case, particularly for Europe, going into 2015. Of course the best time to take a position is when few others want it. Longer-term I fully expect that international diversification---and patience---will pay off handsomely.

As for the recent pullback, another 2%, give or take, and we'll find our long lost 10% correction---in the major averages that is. When we're talking small caps, energy, Europe and a few other pockets, we got it---and some. Whether the bounce we saw late last week signals the bottom remains to be seen. And, unless you find such things entertaining (in which case you may have a problem that needs attention), turn down the volume when your chosen cable news network parades out the pundits who'll offer up every chart known to man showing the dips and curves that justifies his call that the recent lows will be tested twelve more times on an intraday basis, or that the bottom's in and the S&P's heading to 2,200 by year-end, or that we'll blow through recent support on our way to a thousand. While---in my efforts to shed a little light on maybe why the Dow dropped 200 points in 10 minutes on a Monday afternoon---I might reference such things, for investors they are truly the most useless noise.

Frankly, while I'm clueless as to where the market's heading come Monday morning, it wouldn't bother me in the least if it did a little---or a lot---more purging from here. In fact, after such a long-run without any semblance of consolidation, I would welcome it. Of course the market'll do what it'll do whether I welcome it or not.

Here are last week's highlights from my economic journal, edited for your reading (WoW, MoM and YoY mean week over week, month over month and year over year respectively):

OCTOBER 13, 2014

OCTOBER 14, 2014
RAIL COMPANY CSX POSTED STRONG EARNINGS AND REVENUE FOR THE FOURTH QUARTER. Supporting the evidence that the U.S. is indeed picking. Here's the first paragraph from CNBC's report:

CSX, the third largest U.S. railroad, reported a rise in third-quarter profit on Tuesday, beating forecasts and predicting double-digit growth for 2015 as it moved more freight on its network due to a growing U.S. economy.

THE NFIB SMALL BUSINESS OPTIMISM INDEX came in at 95.3, down from its 96.1 reading in August. What's interesting is the decline in the employment and capex components. Both of which are showing marked improvements in other indicators. What contradicts the capex reading is the optimism with regard to now being "a good time to expand". Here's the first paragraph from their press release:

September’s optimism index gave up 0.8 points, falling to 95.3. At 95.3, the Index is now 5 points below the pre-recession average (from 1973 to 2007). Four Index components improved, six declined. Two declined by 10 points total, accounting for the entire decline in the Index score. Unfortunately, the two that fell drastically were job openings and planned capital outlays, which are directly relevant to GDP growth and hiring.

THE ICSC RETAIL SURVEY dropped .7 percent WoW. While this reading, in my view, is somewhat soft, according to Econoday, the outlook is positive. In your typical expansion retail sales grow by 4+% per year:

Despite weakness in the latest readings, ICSC-Goldman describes store sales as strong and discretionary spending, which is getting a boost from low gas prices, as healthy. ICSC-Goldman's weekly same-store sales rate fell 0.7 percent in the October 11 week with the year-on-year rate down 1 tenth to plus 3.8 percent. For October as a whole, the report sees year-on-year sales coming in at plus 3.5 to 4.5 percent. Redbook will post its weekly results later this morning at 8:55 a.m. ET.

THE JOHNSON REDBOOK RETAIL SURVEY was off as well. However, like ICSC, the commentary is upbeat. From Econoday:

Redbook's same-store year-on-year sales rate slowed sharply in the October 11 week, to plus 3.8 percent from an outsized plus 5.4 percent in the prior week. Despite the slowing, Redbook describes the week's sales as positive led by fall apparel and Halloween shopping. Redbook notes that Halloween falls on a Friday this year which retailers see as a positive for traffic. It also notes that some retailers are displaying Halloween and Christmas merchandise side-by-side in an effort to kick-start holiday sales.

OCTOBER 15, 2014
THE FED BEIGE BOOK WAS BASICALLY POSITIVE per the first two paragraphs of its report:

Reports from the twelve Federal Reserve Districts generally described modest to moderate economic growth at a pace similar to that noted in the previous Beige Book. Moderate growth was reported by the Cleveland, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco Districts, while modest growth was reported by the New York, Philadelphia, Richmond, Atlanta, and Kansas City Districts. In the Boston District, reports from business contacts painted a mixed picture of economic conditions. In addition, several Districts noted that contacts were generally optimistic about future activity.

Most Districts reported overall growth in consumer spending that ranged from slight to moderate, at a pace that was often similar to that reported in the previous Beige Book. However, general merchandise retailers in New York noted that sales were weaker on balance since the previous report. Several District reports indicated that retailers were relatively optimistic about the remainder of the year. Meanwhile, tourism activity remained upbeat in several areas, with some reports of higher occupancy rates and solid advance bookings for travel and lodging.

THE CENSUS BUREAU RETAIL SALES figures came in weak MoM -.3%... September was a soft month across the various retail reads.

Today's EMPIRE STATE MANUFACTURING SURVEY came in way below expectations. This is clearly a surprise and perhaps speaks to an overall September lull (considering the relatively soft retail numbers). Employment, however, did show positively in the survey, which speaks to the consistent improvement I'm seeing across the board.

MORTGAGE APPLICATIONS SURGED WoW for refinances, but declined 1% for new purchases...

BUSINESS INVENTORIES rose .2% MoM... The inventory to sales ratio remains at a comfortable 1.29... Too high inventories can lead to production cuts, while inventory growth does add to the GDP calculation... Aside from the GDP relationship, lower inventories are better...

OCTOBER 16, 2014
A huge 23,000 decline in WEEKLY INITIAL JOBLESS CLAIMS. Estimate was 290k... Here's Econoday's report:

There are no special factors behind a stunning 23,000 decline in initial jobless claims in the October 11 week to a 264,000 level that is not only the lowest of the recovery but is lowest since all the way back in April 2000. The decline pulls the 4-week average down 4,250 to 283,500 which is the lowest since June 2000 and is more than 15,000 below the month-ago trend.

Continuing claims, which are reported with a 1-week lag, rose 8,000 in the October 4 week from the prior week's recovery low to 2.389 million. But the 4-week average continues to make new recovery lows, down 10,000 to 2.404 million while the unemployment rate for insured workers continues to hold at a recovery low of 1.8 percent.

This report offers convincing confirmation of September's decline in the unemployment rate to under 6.0 percent, at 5.9 percent. Next week's report will be especially important as the sample week will match the sample week for the October employment report.

INDUSTRIAL PRODUCTION jumped 1.0% in September... The estimate was only for +.4%... Utilities owned much of the increase, but manufacturing production was very solid with a .5% increase after a .5% decline in August.

CAPACITY UTILIZATION grew to 79.3% VS 78.7% in August. From Econoday's commentary:

Manufacturing appears to have regained some steam for the U.S. economy. The third quarter still appears likely to post moderately healthy growth. Today's jobless claims report adds to that argument.

THE BLOOMBERG CONSUMER COMFORT INDEX dropped slightly to 36.2 from 36.8 the prior week. However, expectations soared to a two year high.... apparently due to an improving jobs picture and falling gas prices. From Bloomberg's commentary:

Americans' expectations for the economy in October climbed to the highest level in almost two years as a pickup in hiring, falling gasoline prices, and low borrowing costs heartened households.

A measure tracking the economic outlook climbed to 51 this month, the strongest since November 2012, from 41.5 in September, data from the Bloomberg Consumer Comfort Index showed today. The weekly sentiment index was little changed at 36.2 for the period ended Oct. 12 from 36.8.

The lowest jobless rate since 2008 and the cheapest gasoline costs in a year probably combined to lift household's spirits about the future. The upbeat mood may be difficult to sustain as stocks slump and concern grows that the Ebola virus poses a wider health risk.

THE PHILADELPHIA FED SURVEY results were in positive contrast to the Empire State Survey released yesterday. Higher inventories are couched in terms of being a positive due to strength in orders... Here's Econoday's report:

Unlike yesterday's Empire State report, there's no sudden pause in the Philly Fed's manufacturing sector where the general conditions index held pretty much steady, at a very strong 20.7 vs September's 22.5. The new orders index, which is by far the most important reading in the report, is actually up, to 17.3 vs 15.5. Unfilled orders are also very positive, from 5.0 in September to 11.6 which is very strong for this reading, in fact the strongest reading since July 2004.

Other readings are soft including a 5.0 point dip for shipments to 16.6 and very little change in delivery times at plus 0.6 which does not point to demand-related supply constraints. Employment growth is also down, to 12.1 vs 21.2 while the work week shows its first contraction since February at minus 1.3. Price readings show steady and palpable pressure for inputs and strong price traction for finished goods, up 12.0 points to a 20.8 level that was last matched in April 2011.

Inventories in the region are also up, to 14.8 for an 8.7 point gain, but the build is likely desired given the strength in orders. Another plus is a continued strong reading for the six-month outlook which is down only 1.5 points to 54.5 for the third strongest reading of the year.

This report underscores the strength seen in this morning's industrial production data for September where the manufacturing component bounced back sharply. Next report on manufacturing will be the PMI flash report next Thursday which will offer a national view of October conditions.

THE HOUSING MARKET INDEX offers virtually nothing for the econ bulls. Here's Econoday's report:

The drop this month in interest rates isn't driving up demand for housing, based on weekly mortgage bankers data for purchase applications and now on the housing market index from the nation's home builders which is down 5 points to 54. The key in October's report is the traffic component which is down a full 6 points to 41. Lack of traffic points to lack of interest including lack of interest from the important group of first-time home buyers. The report's two other components are also down with present sales down 6 points to 57 and future sales down 3 points to 64.

All regions show declines in their composite scores especially the Midwest which is down 8 points to 53 and the West which is down 7 points to 54. The South, which is by far the largest region for new homes, continues to lead, at 59 for a 4 point dip in the month. The Northeast is by the smallest region for new homes and trails in this report at 40 for a 2 point dip.
New home builders can't blame high interest rates or high unemployment for the weakness in their sector. Housing starts for September will be posted tomorrow morning at 8:30 a.m. ET.

NATURAL GAS INVENTORIES rose by 94 billion cubic feet last month...

THE EIA PETROLEUM STATUS REPORT showed an increase of 8.9 million barrels of crude inventory. At first blush that seems to speak to huge production and, therefore, the recent huge decline in oil prices. However, the fact that we are in the maintenance season for refineries has to mute any great concern for this and last week's inventory numbers:

OCTOBER 17, 2014
New housing data has been the definition of volatile. Just yesterday the Housing Market Index was anything but encouraging. However today's HOUSING STARTS data showed a rebound in September, following two straight months of declines. Overall, while having bounced back from recession lows, housing has not been the contributor to (leader of) economic growth that it has in previous expansions.

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX rose to 86.4 in October, up from the previous month and beating the consensus estimate of 84.4. The better jobs market and lower gas prices are, as they should, contributing to optimism among consumers. The expectations component hit its best level since October 2012. The overall reading is its best since July 2007. This bodes well for the coming retail season... today's jump in stock prices (following the release of this index) tells of the relative importance of consumer sentiment...

Wednesday, October 15, 2014

Market Commentary (audio)

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Market Commentary (audio)

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Monday, October 13, 2014

How do you see the world? And how might that impact your investment results?

In that the stock market is a market because it's where buyers and sellers meet---and that the player on one side of a transaction essentially disagrees with the player on the other side---there are forever two opposing cases to be made about a given security, and, of course, about the market as a whole.

Having begun my career in 1984, at the tender age of 12 (oops! transposed those numbers)---and being that I make my living helping investors live comfortably (financially and, therefore, emotionally)---I've come to learn that the stuff individuals bring to the market can have a major impact on their degree of long-term success. By "stuff" I mean their personalities; their glass-half-full versus half-empty proclivity, their---to put it crudely---baggage.

How do you see the world? Do you see opportunity? Do you see the amazing technologies that have literally transformed your daily life? Do you acknowledge the productivity, and the freeing up of human capital, resulting from the miracles of those technologies? Do you see the ever-growing connectivity between yourself and the rest of the world? Do you see how international commerce moves products and services around the globe and how it's just now beginning to penetrate the lives of folks who've been mired in underdevelopment and poverty for eons. Do you see the financial markets as gateways to growth for budding global enterprises---as well as sources of opportunity for you to invest and grow your estate? Or do you see a world of conflict? Instead of a world of growing connectivity and, therefore, peace, do you see only the violent exchanges between Russia and Ukraine, etc.? The evil of ISIS? The threat of Ebola? Do you see technology and globalization as little more than job killers? Do you see the financial markets as scary places that can destroy your wealth without a moment's notice?

In the following I'll lay out for you today's short-list bullish and bearish near-term cases for the stock market. I'll do this in complete straight forward fashion. There'll be no attempt to steer you to either side of the debate. Consider this a personal exercise. Observe which story you cling to. Then try to identify why one story makes more sense to you than the other. Consider how you view other aspects of your life. Is there a pattern? Ask yourself if your politics, and/or your chosen media outlet, might be influencing your vision. Does your optimism truly reflect reality? Or are you just a perpetually optimistic sole? Are you pessimistic (I know, "realistic") because your objective assessment of the world tells you there'll be no overcoming present obstacles? Or has that forever been your assessment of the world?

Here's the near-term short-list bullish case for stocks:

Bad news from Europe is now, or very close---given recent declines---to being completely priced into the market.

No U.S. recession in sight. The classic indicators---yield curve, TIPS spread, employment trend, financial stress index, business activity, to name a few---all presently point away from recession in the foreseeable future. Bear markets (but not corrections) are generally recession-born.

Inflation is barely a blip and, therefore, the Fed will remain accommodative (keeping interest rates low) far into 2015, if not beyond.

The dollar is strong and will attract capital from around the world.

Gasoline prices are plummeting. Creating tens of billions of dollars of discretionary income for consumers.

Weekly jobless claims have been dropping steadily. There's historically been a negative correlation between weekly claims and the stock market (they tend to move in opposite directions).

October---the historically most volatile month of the year---has been very rough thus far. Setting the stage perfectly for November and December: the historically best months for stocks.

Fund managers, by and large, have underperformed the market this year. The recent dip is offering them one last chance to catch up by year-end. The moment they believe the bottom's in, they'll buy ferociously.

With the exceptions of consumer staples, health care and utilities, the major sectors are firmly in oversold territory. That's a technical indicator that says there'll be some serious buying in the not-too-distant future.

Short interest (traders aggressively [as in riskily] betting on a decline) is relatively high. As those oversold stocks get grabbed, shorts will panic and cover (buying to close out their positions), pushing stocks even higher. The put/call ratio is also extremely high at the moment---another huge contrarian indicator.

Sufficient worry. There's plenty of angst toward the market these days. And bull markets virtually never end amid pessimism. It's euphoria that kills bull markets. And these days, euphoric we ain't.

Corporate Earnings continue to grow, and won't peak until the economy peaks.

Corporate Balance sheets are flush with cash, and capital expenditures (investing in expansion) are just beginning to ramp up.

The retail investor has yet to join the party. Bull markets tend not to end until after the little guy dives in with both feet.

Warren Buffett---considered by many to be the greatest stock market investor of all time---sees the recent pullback as a great buying opportunity.


Here's the near-term short-list bearish case for stocks:

The Euro Zone is an utter mess. Which puts huge upward pressure on the dollar which will surely hit the revenues and, thus, the stock prices of U.S. multinational companies.

China simply isn't delivering on its 7.5% growth forecast for this year. Meaning commodities and global equities are surely to fall further as the world's second largest economy will not provide the fuel markets were previously discounting.

Corporate earnings per share have been more the result of financial engineering (share buybacks) than they have an increase in business. Companies can only do so much propping up before reality hits and earnings growth wanes.

The Cyclically Adjusted Price to Earnings Ratio (CAPE), which factors in historical earnings results (as opposed to merely this or next year's earnings), sits at a scary high 26.

Small cap stocks have taken a real beating of late. Which is one harbinger of a complete market breakdown.

Declining energy prices foretell of a coming weakening of the U.S. economy.

The present bull market is among the longest running in history. It simply can't hold up much longer amid such global weakness and stretched valuations.

The housing market is simply not showing sustainable improvement and, therefore, not going to fuel the recovery going forward.

Traders are betting big on a drop, as evidenced by short interest and the put/call ratio.

Wage growth has been virtually non-existent and, therefore, we won't see a meaningful contribution to growth from consumer spending (two-thirds of the economy).

Record low interest rates tell of an ugly forward outlook for the U.S. economy.


While I could effectively rebut every single point in both arguments, all of them are---at least to some degree---legit.

So which story would be yours? If you're more impacted by the latter, read them again in reverse order to make sure you haven't fallen prey to recency bias. Now, per paragraph 4, consider to what extent, if any, your opinion might be influenced by your politics and/or other outside forces. I know folks who completely abandoned their long-term strategies based solely on who occupied the White House at the time. In the cases I've observed---without exception---those moves proved to be extremely costly.

So how---other than what I just described with regard to our politics---might our "stuff" impact our investment results? It's quite simple actually:

The eternal optimist can throw all caution to the wind. She's apt to over-invest relative to her personal circumstances (age and obligations). She likes to rush in and buy every single market dip with her reserves. She might refuse to rebalance (sell back to a target allocation) when the market's on an upswing. Essentially, she's prone to taking more risk than her personal circumstances justify, which could find her having to unload positions at the worst possible time (during a bear market) to satisfy her personal obligations.

As for the pessimist: He has a penchant for selling at precisely the wrong times---when the market dips that is. He tends to under-invest relative to his personal circumstances. He often refuses to rebalance (buy back to a target allocation) when the market's on a downswing. Essentially, he allows for less volatility than his personal circumstances justify, which might ultimately compromise---due to subpar long-term results---his retirement lifestyle.

All that said, if you're our client---and you're pessimistic---you know I'll never criticize your carefulness: Performance shmerformance! I'll take peace of mind over performance any day of the week. If, on the other hand, you're an optimist, you've experienced my occasional efforts to tame your enthusiasm.

My aim here is not to suggest that you should attempt to change who you are, but to have you consider to what extent your excitement or despair may be influenced by factors other than the legitimate evidence before you---and how your instincts might not serve you all that well when it comes to your portfolio.

Oh, and as for compiling a list of bullish and bearish indicators: I promise you, unequivocally!, I could have created such a list at any time during my thirty-year career. Like I said in paragraph 1, there are forever two opposing cases to be made about a given security, and, of course, about the market as a whole.

Market commentary (audio)

Click the play button for today's commentary:

[audio m4a=""][/audio]

Sunday, October 12, 2014

U.S. Economic Update...

With just a handful of soft (or softening) readings---consumer credit, wholesale inventories (one to keep a close eye on) and maybe oil and gas inventories ("maybe" meaning it depends on whether you're more concerned with the energy exposure in your portfolio or the gas in your tank), and I'll throw in WoW (week over week) retail sales [although YoY (year over year) they fall in the expansionary range]---last week's data shows the U.S. economy continuing to improve against the headwinds of a weak Euro Zone and a China that looks not to achieve its growth goal for 2014.

As I've suggested here over the past few weeks, I see much of the present stock market angst resulting from concerns over how the forward outlooks, by company, will shape up during the third quarter earnings reporting season, which is just underway. I.e., U.S. exporters are likely to ratchet down expectations, citing a hampering of international sales due to the stronger dollar.

The effect of the strong dollar is definitely containing import price inflation (see last entry below), which was cited in the September Fed minutes (released last Wednesday) as a concern with regard to meeting their 2 percent inflation target. One could legitimately add that last entry to my list of softening indicators, or one could couch it as ultimately a domestic economy stimulator. I'll leave that one up to you...

During the past few weeks analysts had been bringing down their Q3 earnings estimates---i.e., lowering the bar---which makes it all the more likely that we'll see yet another earnings season where two-thirds or so beat the estimates. Whether or not earnings themselves will suffice to jolt the market back to its positive trend remains to be seen. A stock market commentary is forthcoming...

Here are the highlights from last week's log:

 OCTOBER 6, 2014

THE CONFERENCE BOARD EMPLOYMENT TRENDS INDEX. up 6.1% YoY, offers yet another indication that the U.S. jobs picture is improving. From the press release: 

September’s increase in the ETI was driven by positive contributions from six of its eight components. In order from the largest positive contributor to the smallest, these were: Industrial Production, Real Manufacturing and Trade Sales, Initial Claims for Unemployment Insurance, Ratio of Involuntarily Part-time to All Part-time Workers, Number of Temporary Employees, and Job Openings.

OCTOBER 7, 2014

ICSC RETAIL SAILS (CHAIN STORE) WoW were up .1% and up 3.9%. From Econoday's commentary:

Store sales edged higher in the October 4 week, up 0.1 percent for a plus 3.9 percent year-on-year same-store pace vs plus 3.6 percent in the prior week. Cool weather helped sales of fall apparel in the week. Looking back at September as a whole, ICSC-Goldman is calling for a very strong year-on-year gain of 5 to 6 percent. Redbook will post its results later this morning at 8:55 a.m. ET.

THE JOHNSON REDBOOK retail sales number came in down .3% MoM. They remain up an expansionary 5.4% YoY...

THE JOLTS (job openings and labor turnover) REPORT showed yet another increase in job openings. Job openings are now at their highest level since January 2001. That speaks hugely about the improving employment picture...

To the disappointment of many, not necessarily moi (although I understand the sentiment), CONSUMER CREDIT OUTSTANDING declined slightly. Here's Econoday's commentary:

Revolving credit outstanding had been edging higher in what had been a good indication for consumer spending but not in August, slipping $0.2 billion to end five straight months of gains. Non-revolving credit outstanding, boosted by strong vehicle sales and the government's continued acquisition of student loans from private lenders, rose yet again, up $13.7 billion for the 36th straight month of increase. But the gain for the non-revolving component is the smallest since January and, combined with the slippage in revolving credit, made for a lower-than-expected total increase of $13.5 billion. This compares with Econoday expectations for $20 billion and is the lowest total increase since November. The consumer sector, the largest sector of the economy, has not been a stand-out contributor which has held back the recovery in general, and part of this drag is a reluctance among consumers to borrow.

OCTOBER 8, 2014

MORTGAGE APPS increased last week to the best level since July. Speaks positively to home sales in the near-term.

THE EIA OIL STATUS REPORT shows a weekly increase in crude oil inventories. Which of course puts more downward pressure on the price. However, refinery maintenance season (now) reduces refinery demand and can lead to a short-term inventory buildup.

OCTOBER 9, 2014

WEEKLY JOBLESS CLAIMS continues to show a marked improvement in the labor market. From Econoday's commentary:

Improvement is convincing in jobless claims where lower levels spell lower levels for unemployment readings. Initial claims edged 1,000 lower to a lower-than-expected 287,000 in the October 4 week while the 4-week average fell a very sharp 7,250 in the week to 287,750. From a month ago, the average is down 7,500 which is a comparison that offers an early hint of strength for the October employment report. The average is also at a new recovery low, its lowest level since February 2006.

Continuing claims, which are reported with a 1-week lag, tell the same story. Continuing claims in the September 27 week fell 21,000 to 2.381 million for a new recovery low while the 4-week average fell 28,000 to a new recovery low of 2.414 million. The unemployment rate for insured workers is unchanged for a 4th straight week at a recovery low of 1.8 percent.

WHOLESALE INVENTORIES rose noticeably in August. That's not a good sign of go-forward economic growth, as higher inventories can be a negative for future production.

NATURAL GAS INVENTORIES rose 105 billion cubic feet in the October 3 week to 3,205 bcf. Rising inventories is conducive to lower prices.

THE BLOOMBERG CONSUMER COMFORT INDEX climbed last week by the most since mid-November. This one, which, albeit, is a very volatile indicator, is the brightest bit of data coming out today.

OCTOBER 10, 2014

Falling IMPORT AND EXPORT PRICES confirm the view that there is literally no inflation on the near-term horizon. 

Friday, October 10, 2014

Market Commentary (audio)

At the close of today's audio I said "I hope your team wins on Sunday"... I need to add that I only mean that if your isn't playing my team...

Click the play button for today's commentary:

[audio m4a=""][/audio]

Before you go jumping out the window...

At the end of the day, the stock market works like any other market: it's prey to the forces of supply and demand. Wednesday there was great demand for stocks, yet there wasn't sufficient supply at the previous day's prices to meet that demand. Therefore, prices had to be bid higher in order to stimulate an increase in the supply of shares for sale. In other words, buyers came to market and were met by sellers who had no interest in parting with their inventory at the previous day's price. The end-of-the-trading-session buyers had to pay prices that equated to an increase on the day of 275 Dow points.

Of course yesterday was an entirely different sort of day. There was very little demand for stocks, and---in that sellers showed up in droves---there was huge supply. When heavy supply meets light demand, prices must be bid lower if the sellers are serious about dumping their inventory. Hence the 335 point drop in the Dow.

Yesterday's action supported my hunch (as I reported to you Wednesday night) that Wednesday's action was more about short covering than it was about any revelation coming from the Fed meeting minutes.

Now, to attempt to explain the last three days:

Tuesday's action (274 points down) suggested that bad news---specifically Germany's weak industrial production numbers---was bad news. On Wednesday (275 points up), the market seemed to treat bad news ---specifically the Fed's concern over the potentially negative impact of other economies' weakness and a stronger dollar on the U.S. economy---as good news. As for yesterday (335 points down), it appeared that bad news---specifically the European Central Bank president's commentary regarding structural issues in the Euro Zone---was indeed bad news. Of course if you're in that camp that hopes to see a meaningfully deeper correction (it's lonely here in this camp), you'd reverse those conclusions. I.e., you'd have seen Tuesday's and Thursday's news as good news, and Wednesday's as bad.

As I suggested in yesterday morning's audio, I believe that if Mario Draghi (the ECB president) can get the green light from Germany and France to embark upon U.S.-style monetary stimulus, you'd see the European equity markets spike in a big way---even though the Euro Zone is already experiencing much of what QE is designed to accomplish: low interest rates and a weak currency. Therefore, the bullish effect I believe U.S.-style QE would have on European market sentiment would be largely emotional: That cozy feeling that no matter what happens, the ECB stands ready to print their troubles away. The question then would be, would that coziness turn into the confidence that would inspire Europe's players to take full advantage of the increased liquidity and ridiculously low interest rates? As for the Euro, the presumed stimulative effect of a weak currency comes from the cheapening, in foreign currency terms, of the home country's (countries' in the case of Europe) exports---with increasing sales resulting. Of course we're talking the opposite when we turn the tables: The stuff of U.S. exporters is more expensive to European buyers---which is what the Fed seems a little worried about.

As for what to expect going forward: don't know of course, but before you go jumping out the window, remember, there's a term for what we're experiencing, it's called the stock market. And, for whatever reason(s), October has historically been---more so than most---the month that slaps us back into reality.


Thursday, October 9, 2014

Putting the struggle of the everyday investor into context...

Probably the most popular market-oriented essay I ever posted was "A Stock Market Conversation" back during the great bear market of 2008. I suspect its popularity had much to do with its simplicity. As I think you'll get as you read, this puts the struggle of the everyday investor in its proper context.

Here it is, revamped a bit to fit today's environment:

Investor: My gosh, the Dow was down 250 points today! What happened?
Adviser: Stock prices fell.

Investor: Why?
Adviser: Because shareholders wanted to sell and no buyers would pay yesterday’s prices.

Investor: Why wouldn’t they pay yesterday’s prices?
Adviser: Because they didn’t see value in yesterday’s prices.

Investor: Why not?
Adviser: Perhaps they felt that yesterday’s prices were based on earnings assumptions that may not materialize this year.

Investor: Will the economy begin to slow will we have another recession sometime soon?
Adviser: What do I look like, a fortune teller?

Investor: Uh..... so, my portfolio's been getting hammered the past few weeks. Why?
Adviser: Because stocks are falling.

Investor: But why are they falling?
Adviser: Because no one's willing to pay few weeks ago share prices.

Investor: I know, you told me that already. But yesterday the Dow was up over 200 points. Why?
Adviser: Because investors wanted to buy and shareholders weren't willing to sell at day before yesterday’s prices.

Investor: Why wouldn’t they sell at day before yesterday’s prices?
Adviser: Because they saw more value in their stocks than the day before yesterday’s prices represented.

Investor: Why?
Adviser: Maybe they felt that the day before yesterday’s prices didn't fully reflect the upside earnings potential of the underlying companies.

Investor: How could their attitudes change so much in one day?
Adviser: Now that’s a good question!

Investor: Okay, but what if the market keeps dropping?
Adviser: It will keep dropping, I guarantee it.

Investor: What do you mean?
Adviser: I mean it will always keep dropping and it will always keep going up. It’s inevitable.

Investor: How could it keep dropping and keep going up?
Adviser: What I mean is, the market will always have periods when it drops and periods when it goes up. That we know for sure.

Investor: Okay, I get that, but what about my portfolio?
Adviser: Your portfolio will keep dropping and it will keep going up. If you’re a long-term investor, you’re in luck. The market has always kept going up more than it has kept going down --- over the long-term.

Investor: But I don’t like the uncertainty?
Adviser: How much do you not like it? Are you losing sleep?

Investor: Yes.
Adviser: Then get out of stocks.

Investor: But I’ve been told they’re the best investment long-term?
Adviser: You’ve been told right, the best investment long-term – not always the best investment short-term. But is it worth losing sleep over?

Investor: But if I get out of stocks, what do I do with the money?
Adviser: Buy CDs and save every penny you can. You’ll likely have to save more to reach your long-term goals, but you’ll sleep much better.

Investor: I don’t think I’d sleep well earning only what CDs pay.
Adviser: Then learn how to sleep owning stocks.

Investor: How do I do that?
Adviser: Don’t think about your stocks. Hire a money manager and stick with your program.

Investor: When do you think the market will rise again?
Adviser: After it’s done falling.

Investor: Is there anything I can do in the meantime?
Adviser: Yes. Anything but think about the stock market.

Investor: Will the Fed raise interest rates?
Adviser: Of course.

Investor: When?
Adviser: When they see fit.

Investor: Will they raise them at their next meeting?
Adviser: You’d have to ask them – but I’d guess no.

Investor: Will their holding rates low help the market?
Adviser: What do you mean? Help it go up, or help it go down? Both are important.

Investor: What do you mean?
Adviser: You can’t have one without the other. Down trends are essential for the long-term survival of the market. Kind of like taking a rest every now and then. The longer the market stays up without any sleep, the harder the sleep when it finally comes. The good news is the market has always woken up.

Investor: Can’t you be a little more helpful and just give me a forecast for the rest of the year?
Adviser: Trust me, my forecast won't help you. And does it really matter?

Investor: What do you mean, of course it matters?
Adviser: What do you want the market to do – go up or go down?

Investor: Now there’s a brilliant question – I want it to go up, of course!
Adviser: Now or later?

Investor: Huh?
Adviser: Let’s forget about up for a moment and think about down. Since the market is for sure going to go down every now and then, would you rather it go down now or later? Are you going to need the money you have in stocks now or later?

Investor: Later.
Adviser: Okay then, since we know the market will always go down, and since you’re not selling your stocks till later – better that the market go down now rather than later, don’t you think?

Investor: Okay I get it. But I still don't like it.
Adviser: I understand. Most people don't. But it's my hope that a better perspective will lessen your stress during the inevitable corrections and bear markets to come.

Market Commentary (audio)

Click the play button for today's commentary:

[audio m4a=""][/audio]

Wednesday, October 8, 2014

Before you break out the bubbly...

If you believe the financial headlines, dovish commentary during the September Fed meeting, per this morning's release of the minutes, drove the Dow up 275 points today. While I concur that---given the timing of the initial bounce---the Fed likely lit the spark, I have a tough time with the notion that commentary confirming the dovishness of the doviest Fed board in history was by itself sufficient to move the market to such a great one-day extent. I'd say more than a small portion of today's advance had to do with short covering.

I've described short selling here before, but in case you missed it, it's the practice of selling securities not owned by the seller, who hopes to later buy them back at a lower price. More specifically: when one sells short a stock, one borrows it from one's broker. The shares will come from the brokerages own inventory, from one of its customers, or from another brokerage. The shares are sold and the proceeds are credited to the short seller's account. Ultimately the short seller must "close" by buying the same number of shares and returning them to the broker. If the shares are cheaper upon closing the position than what they were originally sold for, the short seller pockets the difference. If, however, the share price rises, the short seller can lose big time. As he'll be paying a higher price for the shorted shares.

I track the short interest ratio on the New York Stock Exchange Composite Index as well as on all of the major sectors. As of two weeks ago today short interest, virtually across the board, had been spiking higher. Meaning folks were betting big time that stocks were going to fall. And, for a few weeks anyway, the shorts---who've been on the losing end of a lot of bets these past few years---were making some serious headway. But then comes today. The market bounces on those Fed minutes and the shorts---I strongly suspect---panicked and rushed to cover their positions. Which means they were buyers today, in a big way. For---as I stated above---if stock prices spike above where they were originally shorted (sold), the shorts can get absolutely creamed. That rushing to cover (buying) pushes stock prices even higher.

Not that you shouldn't feel good about today's rally (unless, like me, you think a real correction [10+%] would be healthier), like I've been reporting; the fundamentals are okay and there's virtually no near-term U.S. recession in sight (not per the usual indicators that is). But 275 points on what served as simply confirmation that the Fed is in no hurry to raise interest rates? Nah... a bunch of today's move was due to short covering.

Speaking of today, the short interest ratios I track have come down a bit from two weeks ago---but they still denote fairly bearish sentiment overall. Which of course is a good thing if you're a contrarian bull, or if you're Warren Buffett. He says he gets greedy when others are fearful.

Stay tuned...


Today's TV Segment (video)

As I suggested during today's TV segment, I suspect that some of the market's recent consternation has to do with concerns over how the impact of a stronger dollar will be couched in the forward outlooks (among U.S. exporters) that'll be offered up over the next few weeks. That said, in the wake of his company's earnings announcement  (handily beat estimates) CEO Klaus Kleinfeld had only positive things to say about Alcoa's international prospects going forward. The stock, as I type, is up over 2% in after-hours trading.

I'll give you my thoughts on today's rally a little later.

Click here to view today's segment...

Tuesday, October 7, 2014

History's favorite...

I just had the thought... given that for every buyer of a share of stock there's a seller, ultimately---in some sense---there's always a winner and a loser. Not that both can't profit from their ownership in the same security, it's just that---since its share price will not stay the same---over some span of time the seller either missed out on further gains (in which case he's the loser in the exchange) or the stock traded lower in the wake of their transaction (in which case---for as long as the security remains below the transaction price---he wins and the buyer loses)...

Here's a 30-year chart of the S&P 500 Index (disregard the volume bars at the bottom; that's an interesting topic for another time): (click to enlarge)

spx 30-yr chart

So, clearly, the 1999 seller remained the winner for a good 8 years. Right? Actually, upon closer inspection we'd have to say that the 1999 seller---given that the 2007 high mark (prior to the most recent bear market) was virtually the same as 1999's---was the winner for a good 12 years. Right? Well, no... not exactly. We gotta factor in dividends.

Here's a 30-year chart of the S&P 500 Total Return Index (factors in dividends):

spx tr 30-yr chart

So, when we consider the complete picture, the 1999 seller remained the winner for a shade over 6 years. Although, just a couple of years later---after the "Great Recession"---he was once again looking pretty smart. Right? Well, yeah... but not necessarily. What if the buyer happened to be one of those crazy people who just kept on buying, no matter what the market did---perhaps through a 401(k) account. Or maybe she had an asset mix---like 60% stocks and 40% bonds---that she rebalanced two or three times a year. In either case, she'd have been a frequent buyer of stocks throughout the 1999 through 2002 period. In the latter case, she'd have been a seller (but only back to 60% stocks each time) from the spring of 2002 through 2007, then a buyer until March 2009, then mostly a seller to this point. Essentially, she'd have been buying (some) while stocks were falling and selling (some) when they were rising. While I don't have a dazzling chart to illustrate that hypothetical, suffice it say that by continuing to buy after the 1999 peak, the seller's winning threshold would have been breached noticeably sooner than 2005.

My point? If we want to look at the transacting of a share of stock in an index fund as a battle of wits (which, by the way, we shouldn't)---given that the market today is higher than it's been at any point in history---as it was this time last year, and in 2007, and in 1999, and at some point in virtually every year during the nineties, and... well, take a look at the chart below---history strongly favors the patient long-term investor.

spx 50-yr chart

Yeah, I know, the continuing to invest and the rebalancing examples really don't apply to the original battle of wits: the seller of those original shares around the '99 peak was indeed the winner for an unusual (given modern market history) number of years, even considering dividends. That said, history strongly favors the patient long-term investor who continues to invest through thick and thin and/or who periodically rebalances to a target mix. In fact, historically-speaking---when we're talking a broad basket of stocks---the patient long-term investor, if he/she lived long enough, always won...

Market Commentary (audio)

Click the play button for today's commentary...

[audio m4a=""][/audio]

Sunday, October 5, 2014

Economic Update...

Last week was a doozy in terms of data. While my brief summary below highlights a mix of softening and strengthening U.S. statistics, on balance, the U.S. economy is improving. I also keep notes on releases for the rest of the world (which I'd be happy to forward you upon request) and, on balance, the rest-of-the-world economy is struggling to find its way.

I'll keep you posted and offer my view on what it all means for the markets in the days and weeks to come.


PERSONAL INCOME AND SPENDING both rose in August: Real disposable personal increased 0.3 percent, compared with an increase of 0.1 percent in July.  Real personal consumption expenditures increased 0.5 percent, in contrast to a decrease of 0.1 percent...

PENDING HOME SALES declined 1% vs having been up over 3% in July. Take out the decline in investor activity and the numbers aren't bad...

THE DALLAS FED MANUFACTURING BUSINESS INDEX rose to 10.8 from 7.1 the prior month...


ICSC retail sales, declined WoW and report a modest YoY number. The last few weeks have been uninspiring...

THE JOHNSON REDBOOK reported better WoW results than the ICSC report. The 4.3% YoY increase denotes an expanding economy...

HOME PRICES declined once again according to the CASE SHILLER INDEX... 6+% YoY growth reflects a steady recent decline in prices...

CHICAGO PMI (Purchasing Managers Index) came in lower than last month, but, basically, remains a positive macro indicator at this point...

THE CONFERENCE BOARD CONSUMER CONFIDENCE surprised to the downside, falling to 86.0 from August's revised recovery high of 93.4...

THE STATE STREET INVESTOR CONFIDENCE INDEX came in ahead of expectations based on a spike in optimism among, of all people, European investors. North American and Asian investor component contracted, in contrast...


MARKIT MANUFACTURING PMI came in pretty strong... Of particular note is rise in both input and output prices as well as the very strong employment report...

ISM MANUFACTURING PMI came in off of the headline number, as did Markit's, however, while the number remains an expansionary signal, the underlying components doesn't inspire the optimism that the Markit report did. While Markit's employment report was strong, ISM's was weaker vs the prior month. Prices paid, however, were up, but not as markedly as Markit's survey reported...

AUTO SALES missed the estimates in September, falling 6.3%. After a very strong August...

MORTGAGE ACTIVITY was unchanged week over week for new purchases, off .3% for refinances...

THE ADP JOBS REPORT came in just fine at 215,000...

All told, while today's CONSTRUCTION SPENDING number was a real disappointment, it doesn't merit a panic at this point...

GALLOP'S US JOB CREATION INDEX offers some optimism on the jobs front . From Econoday's summary:

Gallup's Job Creation Index reached a six-year high of plus 30 in September, up from readings of plus 28 both in July and August. For the third month in a row and only the third time since 2008 workers were slightly more likely to report that their employer is hiring than they were to report that there were no changes in their workforce.


The CHALLENGER JOB-CUT REPORT--- of layoff announcement totaled 30,477 in September which is the lowest since all the way back in June 2000---supports what I'm seeing in the surveys (job growth)...

The low WEEKLY JOBLESS CLAIMS NUMBER lends further support to recent employment indicators. From Econoday's summary:

There are fewer and fewer workers drawing unemployment benefits which points solidly at improvement underway in the labor market. Initial claims fell 8,000 in the September 27 week to 287,000, pulling down the 4-week average by a sizable 4,250 to 294,750 which is nearly 10,000 below the month-ago comparison...

THE BLOOMBERG CONSUMER COMFORT INDEX declined to a four month low: From Bloomberg's summary:

The Bloomberg Consumer Comfort Index declined to 34.8 in the period ended Sept. 28, the lowest reading since May 25, from 35.5. Views of the economy were also the weakest in four months, and the personal finances gauge dropped to its lowest reading since early August...


Very good BLS JOBS number (248k) today. Plus revisions for last August and July put the numbers up to 180k and 245k respectively. Strong confirmation of what I'm seeing in various surveys, etc...

US MARKIT SERVICES PMI came in at a strong 58.9 (above 50 denotes expansion). Backlog orders are at record highs as new business grew at a "sharp and accelerated pace", according to the report...

ISM NON-MANUF PMI came in relatively strong, at 58.6, as well. The employment component being very strong... The reported strength in construction and retail are harbingers of optimism going forward... 

Why the bulls are bullish on the fundamentals...

You've heard blokes like me talk about fundamentals, and how they stack up: "The fundamentals look compelling", "The fundamentals are deteriorating", etc. Last week I explained why stock market bulls are bullish on the economy. This week I'll snapshot why bulls are bullish on things such as corporate earnings, assets, liabilities, profit margins and the like.

My observation is that not nearly everyone is feeling good about the stock market's present state of affairs. If you're in the naysayer's camp, the following charts may surprise you. But, please, take heed; there's no guaranteed---never!---that bear markets can't emerge amid decent fundamentals. I remain sanely agnostic when it comes to the short-term direction of the market.

While the following indeed bolsters the bull's case, make no mistake, bears have their charts as well. Although these days they have to get a bit more creative than they did a few years ago. Were I to take the bear track (remember, I---in the short-run---take neither), I'd simply present these very same charts and remind you that what goes up, or down, as the case may be (you'll see in a second), must go down, or up, as the case may be.

Here's a 30-year look at the cash on the balance sheets of the companies comprising the S&P 500 Index (click on each chart to enlarge):

spx cash

Profit Margins:

spx profit margins


spx earnings

Current (short-term) assets and liabilities:

spx current assets & liabilities

Total Assets:

spx total assets

Total Debt:

spx total debt

Debt to Asset Ratio:

spx debt asset ratio

Price to Earnings Ratio:

spx pe

Price to Book Value Ratio:

spx pb


Stay tuned...

Saturday, October 4, 2014

Is it different this time for the energy sector? Yes and No...

Oil prices are down, and that's a wonderful thing for the consumer. So the following is in no way a complaint about the present price of a gallon of gas. It's just my stab at explaining what's going on and why it might be a bit frustrating for investors in the energy sector...

Boy, and alas, was I bullish on energy at the beginning of this year! Not, mind you, to the point of recommending an aggressive overweight, but a 10-15% allocation on the equity side of a portfolio made good sense to me. And by mid-year the energy sector exchange traded index fund we use was up nearly 15%, while the S&P 500 was up about half that. All the while the sector traded at a multiple (price to earnings ratio) noticeably below the broader market. Plus, the U.S. economy was heating up, as was geopolitical turmoil. And if you check past business cycles you want to own energy as an expansion expands.

And here we sit today with my chosen ETF up a paltry 1.29% on the year. So what gives? Well, lots of experts would tell you it's different this time for the energy sector. And they'd be referring to North American production: Technology has made pulling from underground reservoirs a virtual snap (relatively speaking). Simply put, we can get to the stuff, big time! And, at least for the moment, competition has kept foreign producers (the Saudis) from their usual practice---during times of plummeting prices---of cutting production to support the price. And other countries, such as Libya have stepped up their production markedly as well. And, lastly, much of the rest of the world economy is not doing so hot (demand?? --- and a strong dollar). So yeah, some things---utilizing technology and OPEC's approach in particular---are different this go-round.

But one thing will never change: Companies gotta turn profits. And a plummeting price of what they produce makes for ever-thinning margins. Therefore, make no mistake, there's a point where it no longer pays to produce at a breakneck pace. And that's when production will wane, inventories will get used, and prices will rebound.

So why, amid plunging prices, haven't we already heard about cutbacks in production? Good question. Apparently, at the present price, it still pays to sign paychecks for all those happily employed folks in the big oil and gas producing states. Plus, I strongly suspect that producers expect to see export routes really open up, allowing them to sell their stuff to the rest of the world---inspiring them to keep on expanding...

The scary thing is---as I've complained here before---there are politically-connected interests here at home who lobby heavily to keep those trade routes blocked. Under the guise the lie that U.S. energy producers exporting freely to the rest of the world would ultimately harm the U.S. consumer. Their story goes that opening up the global market would push prices higher and, therefore, hit the consumer's pocketbook in a big way. Makes sense, right? Sure... But here's the thing, if Washington shuts the door on the prospects for exports, I promise you prices are going up anyway. For, as I already suggested, producers will absolutely not produce if it's not substantially profitable:

They'll cut production, prices will rise, the U.S. consumer will take the hit, the foreign consumer will not enjoy lower energy prices, the U.S. exporters of myriad goods and services (and all the folks they would've hired) will not benefit from the foreign consumer's new-found discretionary income, many of today's employees of energy producers will become tomorrow's unemployed, and on and on.

Here's a snippet from that earlier post:
So what would make trading natural gas any different? Unequivocally nothing!! There is no legitimate case, economic or otherwise, for restricting the sale of natural gas to other markets. Any attempts at such, as convincing as they may seem (“higher demand means a higher price”), are led by those (like America’s Energy Alliance, a group formed by Dow Chemical, Alcoa and Nucor) whose execs believe, erroneously, that their companies benefit by restricting global opportunities for U.S. energy producers (I wonder how loud they’d scream if new export limits were placed on them). They don’t seem to understand basic economics: that restricting the export of natural gas can only result in the industry, which is counting on the opening of trade routes, restricting production—which results in what? You got it; a higher price. That is, a higher price without all the economic growth (think jobs) that would result from free trade. Although I suspect that they clearly understand (and would trumpet if need be) that most basic concept when applied to the export of their respective commodities.

And, for now, we'll maintain our energy sector exposure...


Thursday, October 2, 2014

market commentary (audio)

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Wednesday, October 1, 2014

Why I Really Like Down Days, again...

On July 31st I wrote you a letter titled "Why I Really Like Down Days. Seriously!" Thinking I should come at you once again today (you got my audio this morning), I recalled that July article. Other than the last paragraph, the message of that article would be the message for today. So here it is again, with the last paragraph updated:

Why, as an adviser, I really like down days:

For one, they always confirm that rebalancing is a good thing: With few exceptions, after each client review meeting for quite some time now we’ve been reducing exposure to the stock market. Not at all in a market-timing effort, but in remaining consistent with each client’s objectives and tolerance for volatility. Plus, we generally have a steady flow of new cash coming into the practice (recent retirees, heirs, property sales, systematic contributions, etc.). I always feel better buying on the down drafts, as opposed to buying when stock prices are on the rise.

So, today’s a good day. If tomorrow sees follow-through selling, even better. If this is the beginning of that lately elusive 10%+ correction, perfect! There’s no time like the present for the market to take a much-needed, and inevitable, rest.

If this one indeed morphs into that meaningful correction, or an all-out bear market, then we look forward to buying more at cheaper prices when those rebalancing dates come around.

In terms of what today’s all about: Well, there are a number of headlines to consider, but I’m thinking the jump in today’s reading on the Employment Cost Index has (per my recent commentary) traders a bit nervous. Although the bond market, while off a titch, isn’t freaking out on that news (perhaps bond traders are focused on the geopolitical)… ?? but I'm thinking today's more about stubborn buyers than it is panicky sellers. Meaning, with tomorrow's ECB interest rate decision (traders are looking for signs that European QE [money printing] may be on its way [traders would love that, but so far it hasn't materialized]), with Hong Kong's unrest, with Ukraine maybe heating back up, with the Middle East turmoil, and with the U.S. jobs number on Friday, why not test the sellers a bit and see how low they'll go. 

I’ll keep you posted…

Market Commentary (audio)

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